How the 1031 Exchange Works
Real estate is known for never letting down those who invest in it. As with most investments, you can expect there to be some risks and uncertainties. There will be several taxes involved, such as capital gains tax and other tax rules. If you are not careful, you could lose a significant amount to these taxes. You however have the 1031 exchange. You only need to use it as intended for it to save you so much you would have paid as taxes. Here is more about how you can use this option to your advantage.
In most real estate transactions, you tend to make more from a property than you spent when buying it. That profit that comes from such a sale is what is commonly referred to as capital gains. The tax authorities expect you to pay taxes on capital gains, no matter the source. What you have to pay relies on the duration of your ownership of the asset, and your income tax bracket. The longer you have the property, the less you end up paying; it is a long term investment. You can, however, avoid paying those taxes legally, as long as the money made is used to buy another property.
You get to make the most of the 1031 exchange if you meet certain expectations, and do the transactions in a given timeframe.
Money made from the first sale has to go into a like-kind property. The rule here is conveniently vague, allowing you to use any kind of property. You must however ensure it is similar in or higher in value than the initial one. The properties in question also have to be for business or investment purposes only.
You are also expected to find a replacement property in 45 calendar days’ time the moment you sell the first one. You also have 180 days from the moment you sold the first property to have closed the next one. It is important you file for a tax extension if you do not see yourself meeting the set deadlines. It is important that you also do not owe any other taxes in that duration. Those who fail to do so have to pay penalties and interest.
With so many complications, it is best to use a firm to handle those details. They get to hold the money from the sale and do the paperwork. If you were to touch any amount from the sale, you would be forced to pay taxes on them.
For those looking to get out of the real estate business finally, there is no need to worry about the capital gains tax payments. You can check out this site for more info on how, and these reasons why it is a good idea.